Forget The Fiscal Cliff, But Fear The Looming Debt Crisis

Doug Bandow
, ContributorI write about international politics, economics, and development.Opinions expressed by Forbes Contributors are their own.

Uncle Sam is Broke (Photo credit: Infrogmation)

The liberty of Americans is at risk when Congress is in session. Unfortunately, members have come back for a lame-duck session.

Top of the agenda is dealing with the “fiscal cliff,” the impending expiration of tax cuts and imposition of automatic budget cuts. President Barack Obama wants to increase taxes as part of a deficit reduction package.

But the public is understandably skeptical. Half of Americans believe any additional tax revenue would go to new programs, not deficit reduction.

Government spending has continued relentlessly upwards for decades, irrespective of president, party, program, or promise. There’s no reason to believe that this time would be different.

Uncle Sam is ever profligate and irresponsible. Washington wastes money with wild abandon. The federal government redistributes wealth to any group with a letterhead and lobbyist. Surely Washington should curb its expensive tastes before it seizes more of people’s earnings.

Moreover, the spending crisis is too big to solve by taxing the “rich,” whoever they are. Former congressmen Chris Cox and Bill Archer warn: “When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.” In contrast, the total adjusted gross income of those earning more than $66,000 a year was $5.1 trillion and net corporate income was $1.6 trillion. Confiscate it all and there still isn’t enough to pay the annual increase. And you could only steal the money once, since people wouldn’t keep working if government left them with nothing.

Unfortunately, the near-term budget problem pales compared to the longer-term challenge. The national debt is $16.3 trillion, more than the annual GDP. Toss in all current unfunded federal liabilities and the number is $222 trillion, according to economist Laurence Kotlikoff.

Uncle Sam just can’t help himself. The only answer is to cut spending.

Republicans talk a lot about fiscal responsibility, but have been no less irresponsible than Democrats. For instance, George W. Bush raised spending in virtually every area. The Medicare drug benefit was the largest expansion of the welfare state in 40 years.

Nick Eberstadt of the American Enterprise Institute recently analyzed entitlement spending and concluded: “the administrations of Richard Nixon, Gerald Ford and George W. Bush presided over especially lavish expansions of the American entitlement state. Irrespective of the reputations and the rhetoric of the Democratic and Republican parties today, the empirical correspondence between Republican presidencies and turbocharged entitlement expenditures should underscore the unsettling truth that both political parties have, on the whole, been working together in an often unspoken consensus to fuel the explosion of entitlement spending.”

Still, most Republicans now seem to recognize that something must be done about entitlements. Not so most Democrats and their special interest allies. For instance, Senate Majority Whip Richard Durbin (D-Ill.) said he doesn’t want to consider entitlements as part of the “fiscal cliff” negotiations. They are too complex, he claimed. Moreover, Social Security “does not add a penny to our deficit.”

Of course, that is nonsense: the program is running a deficit and the “trust fund” is an accounting fiction. The money has been spent. Anyway, if policymakers aren’t willing to address Social Security, Medicare, and Medicaid, the three largest domestic programs, why bother doing anything? The so-called fiscal cliff is of little consequence compared to the coming spending tsunami powered by Social Security, Medicare, and Medicaid. Observed outgoing Senate Budget Committee Chairman Kent Conrad (D-ND), “If you’re going to solve this problem, you’re going to have to deal with where the spending is.”

The Congressional Budget Office recently published “An Update to the Budget and Economic Outlook: Fiscal Years 2012 and 2022.” The outlook is bleak. For the fourth straight year the annual deficit exceeded one trillion dollars. Accumulated red ink continues to climb: “Federal debt held by the public will reach 73 percent of GDP by the end of this fiscal year—the highest level since 1950 and about twice the 36 percent of GDP that it measured at the end of 2007.”

Next year under CBO’s most favorable estimate the budget deficit would fall to “only” $640 billion. Over the next decade Uncle Sam would pile up another $2.3 trillion worth of debt. The deficit would start climbing again in 2019—for years.

The near-term deficit slowdown does not reflect increased budget responsibility. CBO pointed out that in 2012 “Spending is projected to equal 22.9 percent of GDP—a drop from last year’s 24.1 percent but still well above the annual average of 21 percent of GDP over the past 40 years.” That level would dip to 21 percent by 2018 “before rising again to more than 22 percent in 2022.”

Moreover, explained CBO: “Most of the projected decline in the deficit occurs because revenues are set to rise considerably in the coming years under current law—from 15.7 percent of GDP in 2012 to 19.6 percent in 2015 and 21.4 percent in 2022.” Indeed, revenues are “estimated to increase by one-third between 2012 and 2014” primarily because of expiration of the Bush tax cuts.

Even if Congress doesn’t hike tax rates, “various features of the individual income tax would cause average tax rates to rise over time, increasing revenues as a share of GDP by an estimated 1.7 percentage points over the next decade.” For instance, bracket creep would occur as income increases moved people into higher tax brackets. Social Security taxes also are likely to go up.

Unfortunately, there is little reason to believe that projected spending cuts will occur. For instance, Social Security and Medicare expenditures will be rising. So will health insurance subsidies under ObamaCare. The only question is how much.